In finance, Fibonacci retracement is a method of technical analysis for determining support and resistance levels. They are named after their use of the Fibonacci sequence. Fibonacci retracement is based on the idea that markets will retrace a predictable portion of a move, after which they will continue to move in the original direction. The appearance of retracement can be ascribed to ordinary price volatility as described by Burton Malkiel, a Princetoneconomist in his book A Random Walk Down Wall Street, who found no reliable predictions in technical analysis methods taken as a whole. Malkiel argues that asset prices typically exhibit signs of random walk and that one cannot consistently outperform market averages. Fibonacci retracement is created by taking two extreme points on a chart and dividing the vertical distance by the key Fibonacci ratios. 0.0% is considered to be the start of the retracement, while 100.0% is a complete reversal to the original part of the move. Once these levels are identified, horizontal lines are drawn and used to identify possible support and resistance levels. The significance of such levels, however, could not be confirmed by examining the data. Arthur Merrill in Filtered Waves determined there is no reliably standard retracement: not 50%, 23.6%, 38.2%, 61.8%, nor any other.
Common Uses
Fibonacci retracement is a popular tool that technical traders use to help identify strategic places for transactions, stop losses or target prices to help traders get in at a good price. The retracement concept is used in many indicators such as , Elliott Wave theory and more. After a significant movement in price the new support and resistance levels are often at these lines. Unlike moving averages, Fibonacci retracement levels are static prices. They do not change. This allows quick and simple identification and allows traders and investors to react when price levels are tested. Because these levels are inflection points, traders expect some type of price action, either a break or a rejection. The 0.618 Fibonacci retracement that is often used by stock analysts approximates to the "golden ratio".
